Tuesday, February 21, 2012 11:28:01 AM

Sweden plots HFT surveillance as Italy plans penalty

The Swedish financial watchdog is considering issuing new guidelines on market surveillance and monitoring – even after a national study found only limited negative effects of high-frequency trading (HFT) – while Italy is soon to announce a penalty for the practice.

A recent investigation by Swedish regulator Finansinspektionen (FI) found minimal harm to the Swedish equity market from HFT and algorithmic trading. Yet the watchdog believed greater potential for market abuse could arise from an increasingly fast-moving, high-volume marketplace.

HFT firms typically send out a high volume of orders, cancelling the majority. Some observers contend HFT helps increase liquidity by boosting volumes on trading venues and narrowing spreads by arbitraging away price inefficiencies. But others believe the practice adds no real liquidity to the market and may disadvantage long-term investors by jumping the queue and reaching liquidity first.

“There are clear apprehensions that market abuse has become more extensive and difficult to identify as a result of the sharp increase in the number of orders and trades,” said an FI report outlining the investigation.

The FI recognised many of the issues surrounding HFT and automated trading would be addressed by pending European legislation such as MiFID II and the Market Abuse Directive (MAD). However, the watchdog pointed out it was important such legislation and the supervision of trading needed to keep pace with the market.

“A joint European model for market supervision is worth striving for but it will take time,” stated the report. “In the meanwhile, FI believes it is important to develop solutions for the short-term that focus on the Swedish market.”

The European Commission wants to ensure all HFT firms comply with MiFID II and has imposed safeguards on brokers offering direct market access. MiFID II will also require risk controls at trading venues to ensure platform resilience. The European directive is complemented by guidelines from regional securities watchdog, the European Securities and Markets Authority, which will guide the operation of electronic systems by trading venues and direct market participants. The ESMA guidelines are scheduled to be effected by 1 May and MiFID II is currently under review by the European Parliament, with implementation expected in 2014. 

Following the reading of MAD by the European Parliament, the proposal will then pass to the Council of the European Union for a subsequent reading. The European Parliament and the Council of the European Union will then be required to reconcile their separate texts with input from the European Commission in a series of trialogue discussions.

Italy to impose HFT charge 

Other European organisations are also looking at the issue of HFT. Borsa Italiana is planning to introduce a new pricing scheme from 1 April that will charge firms that post a high proportion of orders to transactions. Buy-side sources familiar with the situation told that firms executing one order in every hundred and cancelling the rest would have to pay a penalty under the new pricing scheme. The Borsa Italiana plan follows a request by Italian regulator Consob.

The UK government’s Foresight project is also investigating HFT, with aims to advise British policymakers on the potential impact of computerised trading on financial markets.

And France is currently pushing ahead with a financial transaction tax, which among other measures penalises HFTs for their high ratio of cancels to executed orders.

Across the Atlantic, US derivatives regulator, the Commodity Futures Trading Commission, has formed a group to focus on automated and high-frequency trading with a view to provide a workable definition of the practice.

Elliott Holley +44 (0)20 7397 3820